Question

Sweet Ltd is a manufacturer of confectionery and biscuits that commenced its business in late 2018. The company provides for cost of replacement of defective products by recognizing warranty liabilities. The warranty liabilities for financial year ended December 31, 2018 (i.e. FY2018) were calculated using the following assumptions Estimated unit cost of replacement- products with minor defects Estimated unit cost of replacement defects Estimated number of products sold during FY2018 having minor defects in FY2019 Estimated number of products sold during FY2018 having major defects in FY2019 Expected timing of settlement of warranty payments-those with minor defects Expected timing of settlement of warranty payments-those with major defects 15 -products with major $30 10,000 10,000 All in FY2019 | 40% in FY2019 60% in FY2020 During FY2018, no request for replacement was received from customers. During FY2019, the following occurred In relation to the warranty liabilities at December 31, 2018, $200,000 was paid out. Of the amount paid, $150,000 was for products with minor defects and $50,000 was for products with major defects, all of which related to amounts that had been expected to be paid in FY2019 1. 2. In calculating its warranty liabilities for financial year ended December 31, 2019, Sweet Ltd made the following adjustments to the assumptions used for the prior year: Estimated unit cost of replacement- products with minor defects Estimated unit cost of replacement- products with major defects Estimated number of products sold during FY2019 having minor defects in FY2020 Expected number of products sold during FY2019 having major defects in FY2020 Expected timing of settlement of warranty payments-those with minor defects Expected timing of settlement of warranty payments-those with major defects 15 $25 8,000 6,000 All in FY2020 20% in FY2020 80% in FY2021

Please solve the above problem. Thank You!

Answer 1

a.
Dec31,2018
Warranty expense	150000
Estimated Warranty Liability		150000
(for minor defects-10000*15)
Warranty expense	300000
Estimated Warranty Liability		300000
(for major defects-10000*30)
b.2019
Estimated Warranty Liability	200000
Inventory		200000
(Settlement of expected claims)
Dec 31,2019
Warranty expense	120000
Estimated Warranty Liability		120000
(for minor defects8000*15)
Warranty expense	150000
Estimated Warranty Liability		150000
(for major defects-6000*25)
Estimated Warranty Liability	70000
Ret.Earn.-Reversal		70000
(Reversal of unclaimed warranty expenses provision)
(40%*300000)=120000-50000
c. Statement of Financial position for Dec. 2019
Assets
Liabilities & Owners' Equity
Current Liabilities
Warranty Liability	450000
Owners' equity
Retained earnings	-70000

	Ledger a/c
		Debit	Credit
	Estimated Warranty Liability
Dec 31,2018	For Minor defects		150000
	for Major defects		300000	120000	40%	Valid upto end 2019
	Bal.c/d	450000		180000	60%	Valid upto end 2020
	Bal b/d		450000
2019	Paid-For Minor defects	150000
	Paid for Major defects	50000
Dec 31,2019	New provn.
	For Minor defects		120000
	for Major defects		150000	30000	20%	Valid upto end 2020
	Ret.Earn.(ret.Earn)Reversal	70000		120000	80%	Valid upto end 2021
	Bal.c/d	450000
2020	Bal b/d		450000